On May 12, 2020 the IRS released Notices 2020-29 and 2020-33, which collectively provide various forms of relief under the existing Section 125 and 129 rules in light of the COVID pandemic. The information below summarizes the newly expanded relief efforts.
1. Increased Flexibility Regarding Mid-Year Election Changes
The Notice relaxes the 125 limitations on mid-year election changes in certain circumstances. The notice makes clear that (a) employers would have to amend their plans to permit this flexibility, (b) such amendment would only be effective for prospective (not retroactive amendments), (c) these rules would only apply during calendar year 2020, and (d) if desired, the employer can choose the specific period during which such changes would be permitted (presumably if the employer doesn’t want to recognize the changes through the end of 2020, as is permitted under the guidance). The IRS guidance makes clear that the notice only provides the outside parameters of permitted election changes, but employers may adopt changes more narrowly within this framework, considering factors such as the potential for adverse selection. For instance, the IRS notes that if desired, the employer could only permit election changes that would result in improvements in coverage (e.g., moving from self-only to family coverage). Of significance, the IRS notes that even though plans may only be amended to permit prospective election changes, to the extent employers were already permitting any of the sorts of changes described below, the plan can be amended retroactively to January 1, 2020 to ratify/legitimize those election changes.
The newly recognized election change flexibility includes the following:
- Enroll in Coverage. Make a new election for employer-sponsored coverage if the employee previously declined.
- Switch Plans or Tiers. Drop current coverage to enroll in different coverage offered by the same employer (or to switch tiers -- e.g., single to family).
- Drop Plan to Switch to Other Coverage. Drop coverage under the employer-sponsored plan, but only upon certification that the employee will enroll in other health coverage (including individual coverage). The employer can rely on an attestation by the employee as to intent to enroll in other coverage as long as the employer doesn’t have reason to believe it is false, and the IRS provides sample attestation language (included below).
- FSA (Health and Dependent Care) Election Changes. Enroll in the FSA, drop FSA coverage, increase or decrease the existing FSA coverage election. These changes apply to both health and dependent care FSA changes. The IRS notes that employers may limit coverage decreases to an amount no less than amounts already reimbursed by the plan.
2. Increased Flexibility Regarding Forfeiture/Use-it-or-Lose-It Rules
For any plan year or grace period ending in 2020, a plan may be amended to permit participants to “spend down” any remaining amounts that would otherwise be forfeited through December 31, 2020. This extension of the spend-down deadline also applies to plans that have a $500 carryover feature (meaning if the amounts over $500 would have been forfeited due to a plan year end date in 2020, that forfeiture need not occur before December 31, 2020.) To be clear, this relief only appears to apply to plans with an off-calendar-year plan year, or calendar year plans that provide for a grace period. Calendar-year plans with no grace period do not appear to be able to take advantage of this relief.
Importantly, the IRS notes that this coverage extension could potentially constitute disqualifying coverage for persons enrolled in an HDHP. So, for instance, if a plan has a 7/1/19 - 6/30/20 plan year, and the plan is amended to permit unused general purpose FSA amounts to be spent down between 7/1/20 and 12/31/20, a person with an unused balance will not be eligible to contribute to an HSA during the 2020 calendar year (unless the employer modifies the design to make the spend-down amount HSA compatible or to forfeit the spend-down balance for persons enrolling in an HDHP).
This relief applies for the entirety of the 2020 calendar year, but any elections made as a result of this guidance may only be made on a prospective basis.
3. Retroactive Amendment Relief
Plans must be amended to adopt these forms of relief, but any such amendment will be considered timely as long as it is made prior to 12/31/2021. Any timely-adopted amendment may be retroactive. Further, the IRS notice makes clear that to take advantage of this relief, plan sponsors must notify participants. (The Notice does not specify the time or form of participant notification.)
4. HDHP/HSA Relief
The Notice clarifies a few important points relating to HSA eligibility and COVID-related services:
- Prior IRS guidance permitted plans to cover any COVID-related services at no cost without impacting HSA eligibility. This Notices clarifies that the guidance was applicable on a retroactive basis to 1/1/2020.
- This Notice clarifies that coverage for any COVID testing or supply services required to be covered at no-cost under the FFCRA/CARES Act will not impact HSA eligibility.
- The CARES Act permitted plans to provide free telehealth services (whether COVID-related or not) without impacting HSA eligibility (through 12/31/2020). Even though the CARES Act was not passed until 3/27/2020, the Notice clarifies that this relief will be applied retroactively to 1/1/20 (in essence retroactively blessing any actions taken by plan sponsors to make telehealth free prior to the passage of the CARES Act).
5. Increase on Carryover Cap
IRS guidance issues post-Affordable Care Act permitted Section 125 plans to adopt a carryover provision allowing up to $500 of unused amounts to carry forward for use in a subsequent plan year. This amount was not inflation-adjusted under prior IRS guidance (but the health FSA contribution limit was -- capped at $2,500 as adjusted for inflation). The IRS Notice creates an inflation adjustment for the carryover amount, indexing the carryover amount to 20% of the FSA contribution limit (rounded to the next lowest multiple of $50). Because the 2020 health FSA contribution limit, as adjusted for inflation, is $2,750, that means the carryover limit for 2020 would be adjusted to $550 (20% of $2,750). This adjustment impacts the 2020 plan year, for amounts carried over into 2021. (For the 2019 plan year and amounts carried over into 2020, the limit remains $500.) Any amendment to incorporate this change must be adopted no later than the last day of the first plan year beginning in 2021 (so, by 12/31/21 for calendar-year plans).
IRS Sample Attestation Language
Name: _________________________ (and other identifying information requested by the employer for administrative purposes).
I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage: (1) employer-sponsored health coverage through the employer of my spouse or parent; (2) individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6) Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or (7) other coverage that provides comprehensive health benefits (for example, health insurance purchased directly from an insurance company or health insurance provided through a student health plan).